Rarely in Canadian history has a Federal Budget been presented in such a complex geo-political environment. Usually, the state of the world is considered in Budget documents only for the purpose of forecasting interest rates which would affect the cost of servicing the national debt in the near or medium term. This time it is different.
This time, the geo-political context looms large. The world’s dominant power and our principal trading partner is using tariffs as a surrogate for physical attack. The effect on Canada is immense. We are effectively at war and that reality underpins this Budget. Indeed, this Budget may have had to be hastily revised only days ago (long after budgets are usually put to bed) to reflect the latest trade salvo from the US.
In prior wars, our geography has protected us, separated by sea from those world conflicts we have joined in. But “geography is history” as the Ukraine knows, a country long beset by the rivalries of its bigger neighbours. Our geography has been benign, with a close friend and major market to the south. Now however, the behaviour of the United States Administration towards Canada has made our formerly fortuitous location a liability.
These realities: economic warfare and geography shape Budget 2025.
There are of course fiscal realities to consider. Fortunately, Canada faces this moment in an enviable position with the lowest debt-to-GDP and the lowest deficit-to-GDP ratios in the G7. That reality, coupled with being one of only two G7 economies with a AAA rating, provides Canada fiscal room to spend, but for how long and how much will be the question.
One word about Budget structure moving forward. This will be the first fiscal plan that bifurcates the traditional budget into an operating budget (comprising governmental operating expenditures) and a capital budget (encompassing a broad definition of spending). This new “Capital Budgeting Framework” separates day-to-day spending from “investments that build the future”. The Government promises to balance the operating budget in 2028-2029 but the capital budget … no time soon and appropriately so, it is argued, given the nature and useful life of capital investments.
Whereas prior governments would have been constrained in adding significant major capital expenditures because of the pressure to reach balance, this bifurcation of spending makes sense- especially if you are going to spend a lot.
The Parliamentary Budget Office has weighed in on the new budgeting framework, not opposing the idea of two budgets, but taking issue over what it sees as an overly broad definition of capital investments. That overly broad definition suits a government that needs to spend and wants to demonstrate an ability to balance at least the operating budget.
By any measure and however justified by the context, the spend will be huge. The decision to go to war can justify putting off a fiscal reckoning painful as that must be for a Prime Minister who was a respected central banker.
Wartime budgets typically summon the nation to the fight and usually call for broad public sacrifice. There wasn’t much of that in Budget 2025, but it may yet come. Because in war, a nation can have both guns and butter; but not forever.
Exogenous events have shaped Canada’s reality since Mark Carney decided to seek the Liberal Leadership last March. In that Campaign for Leader and in the Election Campaign which followed, he has been relentlessly resolute and realistic. He has said that Canada’s answer must be to build resilience, diversify trade and promote Canadian identity. These themes are reflected in the Budget,
If words can be said to have urgency, the words of this Budget do. Everything about this Budget is the antithesis of stasis. This is an activist Liberal Budget but not on the social spending front as has been so typical of Liberal governments over the last few years. This is a Government choosing an aggressive path, announcing measures, e.g.: to support those displaced by the tariff wars; to use Canadian steel to build high speed rail; to invest in ports and other infrastructure; to use Canadian lumber to build houses; to “Buy Canadian”; to become our own best customers; to smash down interprovincial barriers; to build up defense and defense industries; to protect and develop our assets (e.g. critical minerals); to lessen our dependency on trade with the US by doubling our non-US exports; to build out long-stalled infrastructure by identifying national projects to be launched; by calling on the private sector to also step up.
These are the measures and clarion calls more typical of wartime. It was in World War II that Canadians were last asked to meet that kind of challenge. This Government believes that the grandchildren of the greatest generation will do so again, turning a necessary and urgent transition into a true generational shift.
A cautionary note is in order. The Budget Bill needs to pass in the House of Commons (by mid-November) or the Government falls. Prime Minister Mark Carney heads a Minority Government. It is a strong minority; but there is still a degree of risk that Opposition Parties could cooperate to oppose the Budget and break the Government. This degree of cooperation and collective self-suicide would be unusual.
None of the Opposition Parties can afford an election now and the Canadian public would punish the Opposition Parties for a wasteful election exercise when the Canadian house is burning down. Nonetheless, Opposition Party leaders are under pressure to show leadership to their rank and file and to preserve their leadership. Mistakes happen and miscalculations can occur. If we should find ourselves there, a short and sharp Federal Election will be done by Christmas, and the Liberals will have their majority.
Budget 2025 signalled a Government in a hurry to get started because but many of the necessary changes will take some time yet.
The full Budget document can be found here.